Home / Payments / Payments in the Cloud

Payments in the Cloud

We’ve got our cloud computing meeting tonight, and many of you may wonder what the hell all that is about. Well, cloud is the big buzz in the tech sector because it’s new, glitzy, sexy and brings together all the stuff that’s gone before.

From the old days of bureaux and mainframes, through outsourcing, SaaS and ASPs, cloud does it all.

So what is cloud computing?

The simplest definition is hosted services using the internet, but it covers a lot more than that including delivery of software, hardware and infrastructure as a pay-as-you-go service.

You just pay for what you use.

There are lots of discussions about this right now, as Google and Amazon have made cloud computing a key offer in their portfolio of services.

Equally, to illustrate the power of cloud one of the best examples is Animoto, as blogged about a while ago.  Animoto is a small website that went from hardly any users to millions over a weekend thanks to the viral effect of Facebook, and they managed to handle the sudden upsurge in demand by just paying for compute power provided by Amazon.

It’s not just about scalability however.

I’ll add some more to this tomorrow, when the research results are released, but thought I would share a story of one area where I see this taking off big time.

Payments processing.

You heard me: payments processing,

Cloud computing is perfect for payments processing.

Here’s three examples.

SEPA is here but, for one of my bank buddies, SEPA Direct Debits and the PSD is a pain in the arse.

Y’see, they don’t have any customers who want or need cross-border direct debits.

Not a single one.

So they’ve decided to handle SEPA Direct Debits (SDD) on an exceptions basis, with the view they might need to process three or four a year.

If it spikes above that however, which they don’t believe it will but you never know, then they would like a SDD Cloud Computing service to handle that.

A secure SDD cloud service of course, which could be delivered easily by the EBA or one of the commercial clearing companies.

Which brings me to the second example.

Now that SDD is here, by November 2010 every single bank in Europe must be reachable through the SDD scheme.  That's the law under Regulation 2560, so like it or lump it you gotta be able to receive those debits in an SDD format.

In other words, you should be able to send a direct debit payment in the SDD scheme to any bank account holder in the 27 countries of Europe, and the bank should be able to receive that instruction and process it.

So we all start thinking of standards and bringing in new systems that use XML and ISO20022 … except we don’t have to do that.

Howsabout a cloud conversion service to take anything you have winging its way over to your systems and they convert it to your systems formats as it’s flying over.

A conversion service which can handle the odd message or the many on an as needed pay-as-you-go basis.

Lovely.

Which brings me to the third example.

Banks are looking at how to create added value in this post-SEPA commoditised payments world by talking about corporate services and value-add through real-time information provision, einvoicing, financial supply chain management and more.

So howsabout a bank created financial supply chain solution through the cloud?

The corporate customer just has to plug their back office ERP systems, general ledger, invoicing, account receivables and payables, and the cloud will just automatically keep all their fields of financial information updated and managed in a real-time service.

Financial clouds will start to take off over the next five years and, as mentioned, I’ll add more about this through the week.

The only challenge will be where the legal liability lies when your cloud goes down, as happened this week when Microsoft’s cloud services for T-Mobile exploded losing all the customer data for T-Mobile’s Sidekick users.

This may seem inconsequential, but the new Sidekick has been heavily marketed as a lifestyle phone with camera, 3G access, email and more and the cloud was the place to keep all of your contacts, photos, updates, social messaging, etc. In other words, the failure of the cloud, in this case, lost everyone’s digital lives.

That’s pretty consequential (had Microsoft heard of disaster recovery, business continuity, etc?).

Who’s accountable is half the question but the other half is how much damage such explosions can cause to your credibility rather than the cloud provider’s?

So yes, there are still questions about cloud but these will get fixed.  In the meantime, if you're not ready for cloud then you better get ready, as there is no way that a bank can continue to buy servers and systems that are only used on a Friday peak volume the day before Christmas.

No way.

And that's one of the big points about cloud computing: getting the technology to move from being a high capital expenditure and investment to just being a variable operational expense on the basis of usage.

If that last point doesn't ram it home, then perhaps this point will.

One bank said to me during this research that the typical cycle time compute power they use would have an internal cross-charge from the IT Division of $200 for every $1 of cost for the same compute power from Amazon EC2.

For a general analytic process, he was being charged $12,000 or more per night by the internal IT Division for what would cost $60 from Amazon.

That's why cloud computing will take off in financial services.

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

Check Also

How difficult is financial inclusion?

There were lots and lots and lots, literally, of focus upon mobile and financial inclusion …

  • Oliver

    Cloud is very interesting topic, so I hope to read more here, as I’m not able to attend your meeting.
    Excellent statement on loosing data: the blame and reputation damage will fall mainly on the data owner (bank) and not on the service provider.
    One point I missed in this article is about compliance to regulatory requirements. How do you assure that you know, where your data is located geographically! I’m not sure how many banks would be happy to know that their cloud data is located somewhere outside Europe.

  • David Hannam

    Now I remember the original Borland sidekick, one of the first Personal Information Managers….happy days
    http://www.emsps.com/oldtools/borskv.htm

  • hmm… I’ll dispute that. A retail payment message is at most 512 bytes, so 1/2kb * 1m ~= 1/2 GB. It’s not serious processing for modern hardware. You could just leave that switched on 24/7 without it being a significant expense.
    (There’s a mass of processing that’d go on to support that for money laundering checks, fraud, etc – but that’d increase sub linearly with the number of transactions.)

  • nice article and agree that this area will be big. one comment re your bank buddie’s exception process. If his/her bank receive an invalid SEPA direct debit (e.g. for an invalid account), or the customer disputes the debit and requests a refund, does the bank plan to manually create the necessary PACS message in order to reject/return the direct debit? What are the chances of manually creating a correctly formed ISO20022 message?

  • nice article and agree that this area will be big. one comment re your bank buddie’s exception process. If his/her bank receive an invalid SEPA direct debit (e.g. for an invalid account), or the customer disputes the debit and requests a refund, does the bank plan to manually create the necessary PACS message in order to reject/return the direct debit? What are the chances of manually creating a correctly formed ISO20022 message?

  • Chris Skinner

    Thanks for the inputs guys
    @Oliver
    Yes, the bank will get the reputational hit, but the regulatory compliance hit, whether inhouse or out-of-house, often comes down to the organisation providing the processing. If a third party states they can provide a service that is subject to compliance rules therefore, then they have to comply or they will get fined rather than the financial institution in some instances.
    @David
    Wow! I thought you were younger than that.
    @Thomas
    I think you’re disputing the analytics costs for an investment banker point made at the end of the blog. That’s serious compute power according to the head of trading which involves TB rather than GB. Hence, the high internal cross charging cost.
    @Ronan
    As far as I can tell, they expect a third party to do all the conversions for them.

  • Chris Skinner

    Thanks for the inputs guys
    @Oliver
    Yes, the bank will get the reputational hit, but the regulatory compliance hit, whether inhouse or out-of-house, often comes down to the organisation providing the processing. If a third party states they can provide a service that is subject to compliance rules therefore, then they have to comply or they will get fined rather than the financial institution in some instances.
    @David
    Wow! I thought you were younger than that.
    @Thomas
    I think you’re disputing the analytics costs for an investment banker point made at the end of the blog. That’s serious compute power according to the head of trading which involves TB rather than GB. Hence, the high internal cross charging cost.
    @Ronan
    As far as I can tell, they expect a third party to do all the conversions for them.